System and method of assessing and rating vendor risk and pricing of technology delivery insurance

ABSTRACT

A method and system for providing a standardization and commoditizing the process of technology contracts and creating method for assessing, scoring, ranking and rating technology vendors for the purpose of comparing vendor bids on a project and for structuring and pricing insurance/surety contracts. Intrinsic and two-way vendor ratings are established for each of the vendors in a particular project. This two-way rating is used to provide a risk adjustment to the nominal bid of each of the vendors. The two-way rating is also utilized to structure and calculate an insurance premium based upon the probability that the vendor would fail/default on the delivery of a technology project.

CROSS-REFERENCE APPLICATIONS

The present invention claims the benefit of U.S. Provisional PatentApplication 60/227,513, filed on Aug. 24, 2000, and 60/290,069, filedMay 11, 2001 and continuation-in-part to U.S. patent application Ser.No. 09/930,140, filed Aug. 16, 2001, now U.S. Pat. 6,647,374.

FIELD OF THE INVENTION

The present invention is directed to a method and apparatus for thecommoditization of service contracts allowing various vendors to beranked based upon their intrinsic strength (intrinsic rating) and ontheir ability to deliver on a specific project (Two-Way Rating). Thepresent invention is also directed to a method and system for pricingtechnology delivery insurance based upon the failure/default by avendor. This assessment and ranking will allow insurance companies tostructure and underwrite insurance/surety contacts, by allowinginsurance companies to assess the comparative risk inherent in specificvendors hence giving the insurance company/guarantor the ability toprice risk based premiums or fees and the ability to underwrite andmonitor vendor performance.

BACKGROUND OF THE PRESENT INVENTION

Historically, if a particular customer wished to have a vendor toprovide a particular product for the customer, such as erecting aparticular structure, the customer would publicize this fact to theappropriate industry along with various parameters required for thevendors to prepare a proposal for erecting the structure. The customerwould then review the proposals received from the vendors for thepurpose of choosing the particular vendor to which a contract is awardedfor erecting the structure. Generally the choice of the vendor will bebased upon the total cost of the project, the time it would take tocomplete the project, as well as various other factors, such as thereliability of the particular vendor. As can be appreciated, at leastpartly basing the awarding of a large contract on the perceivedreliability and trustworthiness of the vendor could result in anon-timely completion of the project as well as the project beingdelivered over the agreed upon cost if the perceived reputation of thevendor was unwarranted.

Additionally, along with the subjective nature of the decision to rewarda contract, the contract process itself was rather time consuming. Oncea customer decided to embark upon a particular project, various vendorsmust be alerted to the existence of such a project which typicallyoccurred by the customer mailing the request for proposals (RFPs) tovarious potential vendors or publishing the request for proposals inindustry publications. As can be appreciated, recent advances intechnology have resulted in lessening the communication time between acustomer and a potential vendor by the utilization of the Internet.Although the current invention does not depend on the Internet for itssuccess.

Additionally, an auction concept has permeated corporate thinking to thedegree that most sectors are now attempting to turn their buying orselling decisions into a bidding exercise where buyers and sellerseither are aggregated into a virtually monopsony (single buyer) ormonopoly (single seller). Although the reverse auction concept wouldwork well for generic products and commodities, it is yet to be appliedto the burgeoning technology industry which includes softwaredevelopment contracts.

To consider a reverse auction in any field, it is necessary tocommoditize the service contracts and apply objective standards toanalyze the pool of bidders. Once standards have been applied toneutralize the impact of extraneous variables, the normal interplay ofsupply and demand will yield price discovery. However, while it isrelatively easy to make a well known substance such as wheat or corninto a commodity, the commoditization of a less quantifiable conceptsuch as technology services becomes problematic. The present inventiondescribes a formula and business model that makes this possible.Generally, once the various proposals are received by the customer fromthe vendors, the contract is awarded to the vendor whose total cost isthe lowest or who can provide the product most quickly, or both. Whileon the surface, it would appear that it would be obvious to award thecontract based upon the cost or time of delivery. However, thisyardstick would not take into account the performance of the vendor.Rather, it is important to determine whether the vendor can perform thecontract in the time period required or for the agreed upon cost.Therefore, it is important to be able to rank the reliability of thevendors and factor this reliability into the time of performance and thecost of the project to better compare the vendors. This will provide tothe client both a nominal bid and a risk-adjusted bid (which includesthe component of performance strength and delivery within it). Abilityto rate performance itself is derived from the analysis of vendorcapabilities using the intrinsic and the two-way rating process at theheart of this invention. Furthermore, with respect to rather complexcontracts a better comparison can be made if the contracts arepartitioned into various independent modules/phases for the purpose ofcomparing the bids, abilities and the risk inherent in specific vendors.The understanding of the risk inherent in various components of thecontract will allow the insurance company/guarantor to underwritetechnology risk, which is the ability of the vendor to deliver on thetechnology that he is contracted to deliver.

Various prior art patents address several aspects of the prior art. Forexample, U.S. Pat. No. 6,088,678, issued to Shannon, describes a processsimulation technique using benefit-trade matrices to estimate schedule,costs and risks. As illustrated in FIGS. 2 and 3, a process simulationtool is utilized employing benefit-trade matrices 21a-21f and varioussteps during a design process. The benefit-trade matrix comprises amultiple variable look up table embodying history data relating to aparticular step indicative of weights of schedule, cost and riskelements as well as user-input rating data. As described in column 7,lines 5-20, if a risk metric is scored high, the user may decide toforego simulation and take the risk that a mistake was not made, or makethe appropriate trade off if a mistake was made. However, while it isclear that the patent to Shannon does take into account risk, thepurpose of this accountability is to determine whether a simulation iscost effective. There is no suggestion that this risk be applied tovarious vendors. Indeed, it would appear that this patent is directed toa technique in which a schedule is determined by a single vendor used tocalculate resources required to complete a particular project. There isno implication of an insurance structure within this.

U.S. Pat. No. 6,195,646, issued to Grosh et al shows a system and methodfor facilitating the valuation and purchase of information. This patentacknowledges that at present, few techniques exist for the determinationof what to charge for any particular data. As indicated in column 2,lines 1-10, the patent to Grosh et al is directed to facilitating theupcoming commoditization of information. Therefore, while the patent toGrosh et al does recognize an impending trend in the industry, it doesnot address the manner in which this trend is to be utilized to obtaindata relating to various contracts to be awarded.

U.S. Pat. No. 5,734,890, issued to Case et al, illustrates a system andmethod for analyzing procurement decisions and customer satisfaction.Although this patent acknowledges that the vendor's qualifications areimportant in making procurement decisions, it does not provide a clearindication of relatively ranking these vendors based upon the time ofperformance and cost of a particular project as well as partitioning theproduct when making this determination (or of structuring an insurancecontract from this).

U.S. Pat. No. 5,765,138, issued to Aycock et al, relates to an apparatusand method for providing interactive evaluation of potential vendors.Vendor requirements are selected for vendor qualification and thesevendor requirements can be assigned a relative weight on the basis ofproject objectives. A selected group of requirements defining qualitycontrol standards are supplied in an RFP/RFQ as objective criteria to bemet with a desired vendor in a project. Upon receiving the responses,each response is provided with a scaled score. By correlating the scaledscore with the relative weight of each of the requirements with respectto the project objectives, the patent to Aycock et al enables anobjective evaluation of the supply responses in order to determine asupplier maturity level. It is important to note that the analysisdescribed in Aycock et al is based primarily upon responses received bythe particular vendors. Additionally, this patent does not describe asystem in which the contracts are partitioned to better compare thevendors during the selection process, allowing an insurancecompany/guarantor to underwrite the technology risk. Also, this patentdoes not address the vendors ability to deliver on a “specificcontract”.

None of the patents described hereinabove anticipates or suggests amethod or system in which vendors are rated on their generalized pastperformance as well as specific past performers relating to the type oftechnology forming the subject of the contract bid. This rating systemwould be normalized in a manner in which all of the vendors bidding onthe contract constitute the entire universe of bids for that contract.This rating system would be used to provide a good measure to comparenominal bids of the contract by providing the risk-adjusted bid of thevendor in addition to the nominal bid. The rating system would be usedto determine an insurance premium insuring the customer against defaultfor non-timely performance of the contract.

SUMMARY OF THE INVENTION

The deficiencies of the prior art are addressed by the present inventionwhich is directed to a method and system for partitioning contracts intovarious independent modules/phases, allowing the complexity of eachmodule/phase to be determined as well as utilizing these individualmodules/phases in the assessment of a particular vendor's capability ofdelivering the entire contract in a timely manner as well as determiningthe ultimate cost of the project. This creates a structure allowing theinsurance company/guarantor for the first time to underwrite riskinherent technology contracts and price a risk-neutral premiumassociated with this risk, that is, the relative ranking of vendorsbased upon their ability to deliver and the relative risk inherent in aparticular vendor. The distinguishing aspect in determining value, asopposed to price, is to objectively quantify the relative risksassociated with using individual vendors. This is because second-tiervendors will be usually less expensive than first-tier vendors, but therisk is greater. Choosing the lowest bidder could turn out to be amistake. Therefore, the risk-adjustment applied to the nominal bidsubmitted by a vendor is the key to accurately assessing the risk in aparticular vendor. The system and method according to the presentinvention can restore parity between bids and compare them on a uniformscale familiar to commodities markets.

A score or ranking is developed for each of the vendors based upon thevendor's historical reliability as well as normalizing the vendor'sranking with respect to the other vendors for the purpose of determiningthe appropriate vendor. This is known as the intrinsic rating. A two-wayor extrinsic rating is assigned to each project-vendor combination aswell as establishing a subsidiary risk measure. The two-way rating basesthe assessment of the technology vendor or the ability to execute anddeliver on a particular project. While the intrinsic rating of aparticular vendor might be high, the two-way rating may be low if thevendor does not have the relevant expenditure that a particular projectrequires. The two-way rating is a numerical ranking that addresses boththe vendor to which it is assigned and a particular project underconsideration. One vendor may have a relatively high two-way rating forone project, and a relatively low two-way rating for another. Theintrinsic or standalone ranking is developed reacting to the vendorstrack record in the industry. Both these tools the 1) intrinsic ratingand 2) the two-way ratings are used for the process of vendor selection.The intrinsic rating is a numerical ranking assigned to a vendordepending solely on the vendor's a-priori characteristics regardless ofthe project under consideration. Therefore, any vendor only has oneintrinsic or standalone rating and one two-way rating for a particularproject which is the vendor's ability to deliver on a specific project.The intrinsic and extrinsic rankings allow the customer to select thebest vendor suited to the particular project. The ratings for both theintrinsic and the extrinsic two-way ratings are between 0 and 1 with 1being the highest score attainable.

Furthermore, the intrinsic ranking can be modified by the customer toproduce a modified intrinsic rating. The modified intrinsic rating isthe rating of the vendor (as modified by the customer) based on on-goingvendor performance.

Furthermore, the nominal bid submitted to a customer by a vendor isadjusted using the vendors's two-way rating providing a risk adjustmentfactor which incorporates both the time to delivery of the vendor andthe cost per day for the vendor into its parameters to adjust thenominal bid. For a very weak vendor the risk-adjustment could besignificantly high and for a strong vendor the risk-adjustment would bemarginal or low.

Once a particular vendor is chosen utilizing the criteria of the presentinvention, the probability that the vendor would default on theperformance of the contract as well as the premium for obtaininginsurance for the performance of the contract can be established.

The present invention therefore is also directed to a system and methodof obtaining operational risk insurance in the context of outsourcingtechnology development or technology contracts. A suitable structure isestablished whereby the interest of the insurance company, the customerand the primary vendor are simultaneously preserved. This vendor can belocated in the United States or any country of the world.

Therefore, it is an object of the present invention to develop a systemand method of partitioning a contract, such as a technology/softwarecontract into independent modules/phases.

It is yet another object of the present invention to provide a systemand method to develop a scoring/rating for each of the vendors.

It is still yet another object of the present invention to develop amatrix for comparing vendors bidding on a single contract. The matrixcomprises the partitioning of the technology contract, the vendorintrinsic rating, the vendor two-way rating, the risk-adjusted bid andthe insurance/guarantee premium attributable to a particular vendor riskand delivery (“the CTO matrix”).

It is still another object of the present invention to develop a systemfor providing risk adjustments to the bids of each of the vendors.

It is still another object of the present invention to develop analgorithm for determining the price of a premium for insurance/guaranteecoverage for the performance of the vendor.

Other objects and characteristics of the present invention will be madeapparent from the description below and the attached drawings.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a flow diagram illustrating the generalized method of thepresent invention;

FIG. 2 is a flow diagram illustrating the calculation of the vendor'sintrinsic rating;

FIG. 3 is a flow diagram illustrating the calculation of the vendor'smodified intrinsic rating;

FIG. 4 is a flow diagram illustrating the calculation of the vendor'stwo-way rating;

FIG. 5 is a flow diagram illustrating the calculation which adjusts thevendor's nominal bid for a project into a risk-adjusted bid;

FIG. 6 is a flow diagram that shows the overview of theinsurance/guarantee algorithm; and

FIG. 7 shows the methodology to calculate the risk premiums for thetechnology insurance/guarantee contract.

DETAILED DESCRIPTION OF THE PRESENT INVENTION

FIG. 1 illustrates the broad concepts of the present invention 10 inwhich a technology or similar IT contract is disaggregated for theprocess of efficient vendor selection and to establish better standardsin the technology market. The commodity concept is largelymisunderstood. Although most people can name commodities without muchtrouble, it is an artificial construct. There are no naturally occurringcommodities. Even the most common substance, water, is far from uniformin properties of behavior across regions of countries. Every commodityis an artifact assigned to facilitate trading between disconnectedparties. Commoditizing removes physical properties and othercontrollable variables from pricing discussions through standardization.For example, removing credit risk from a mortgage-backed security allowsits price to be dictated solely by interest rate considerations. Bydoing so, liquidity, tradeability and ultimate market potential are allincreased. Anything can be made into a commodity through appropriatestandardization. The problem that must be solved with respect totechnology contracts is to standardize, or equalize, the properties ofthe contract or project.

The present invention approaches the problem of commoditization oftechnology contracts in terms of assessment of risk. The presentinvention therefore develops a system and method for valuing technologycontracts hence allowing vendors to put in bids which are efficient andrelevant.

Once a customer determines that he wishes a contract to be bid upon, thepresent invention would utilize a reverse-auction pricing model based onreplacing the lowest cost selection method normally used in selection ofthe vendor with a more meaningful lowest risk-adjusted cost concept.Once these adjustments are determined, they are made to the nominal bidsprovided by the vendor.

Once a request for proposal (RFP) is generated at 12, the customer wouldpost the RFP in a secure area within a computer platform. Rather thangoing straight to the vendors, the RFP is further processed utilizingthe expertise of the present invention. Alternatively, the customers arefree to bypass this step and send the RFPs to their preferred vendors.

Once the RFP is generated, the RFP would be partitioned at step 14,regardless of size or complexity, into a series of non-overlapping workmodules or a series of phases. A work module or a phase is defined asthe portion of a technology contract that does not overlap with anotherportion. The computer platform would recognize the partitioned RFP. Thedisaggregation of the RFPs into independent modules or phases as inputsto the reverse auction bidding platform is one component of the presentinvention. Each of the vendors would be then asked to bid according tothe schedule of modules or phases to estimate the costs of largetechnology contracts 16. The original bids that the vendors submit isknown as the nominal bids. These nominal bids would be added to thecomputer platform in any known manner such as scanning them in or bysending the bids to the computer platform via the internet. These bidsare shown for the different modules or phases in the top portion ofTable I, as shown below. After the vendor is selected at step 18utilizing various techniques at step 20 including the use of a 1)scoring algorithm (both the nominal and the two-way ratings), the use ofa 2) CTO matrix and the use of 3) risk adjustments to nominal bids, thecontract would be awarded at step 22. Based upon an algorithm to pricethe premium for insurance coverage 26, insurance coverage would beobtained at step 24. The computer platform would be provided with theappropriate software to make the proper calculations to determine thevarious nominal and two-way ratings. The computer platform would alsohave the capability to compare the nominal and two-way ratings of eachof the vendors.

TABLE I (CTO MATRIX) Client Client X Vendor 1 Vendor 2 Vendor 3 Vendor 4Start Date Dec. 1, 2000 Dec. 1, 2000 Dec. 1, 2000 Dec. 1, 2000 ProjectName End Date Jun. 30, 2001 Jan. 1, 2002 Apr. 30, 2001 Jun. 30, 2001Execution (days) 209 720 149 209 Intrinsic Rating 0.80 0.75 0.60 0.20Two-Way Rating 0.43 0.24 0.33 0.01 Requirements $70,000 $169,000 $50,280$22,000 Design $87,000 $211,500 $62,850 $27,500 Build/Unit Test $52,500$126,800 $37,710 $16,500 Integration Testing $17,500 $42,250 $12,570$5,500 System Testing $70,000 $169,000 $50,280 $22,000 Installation$35,000 $84,500 $25,140 $11,000 Support $17,500 $42,250 $12,570 $5,500Nominal Bid $349,500 $845,000 $251,400 $110,000 Risk-Adjusted Bid$689,578 $845,000 $726,227 $1,193,713 Insurance/Guarantee Premium$269,787 $0 $747,820 $668,125

FIG. 2 illustrates a flow diagram for adjusting the nominal bidssubmitted by each of the vendors for the risk inherent in selecting eachof the vendors. As previously indicated with respect to FIG. 1, an RFPis generated and partitioned into the independent modules or phases. Thedisaggregating of the contract into its constituent parts allows vendorsto bid on components of the RFP. As indicated in FIG. 1, thedisaggregation of the contract into component sections as well as theuse of other algorithms would be utilized in the vendor selectionprocess at step 18. These selection criteria shown at step 20 wouldinclude the use of a scoring algorithm, the use of a CTO matrix as wellas the use of risk adjustment to nominal bids. These algorithms would beprovided on the computer platform.

The vendor will be rated in several manners including an intrinsicstandalone rating of the vendor, as well as a two-way extrinsic ratingof the vendor and finally a modified intrinsic rating of the vendorwhich is based on feedback from the customer and on-going performance ofa vendor. These ratings would be calculated on the computer platform.The intrinsic rating and the modified intrinsic rating are used to ratethe vendors's history based upon the vendor's answers to a number ofinquiries as well as the customer's experience utilizing the vendor. Thetwo-way rating is determined relative to the project under proposal andis relative to the other vendors bidding on that particular proposal.Both the intrinsic and extrinsic ratings of each vendor is shown inTable I. The manner in which these ratings are determined will bedescribed hereinbelow.

The intrinsic and modified intrinsic ratings would generally be used bythe client to narrow the number of vendors to which a particular bidwould be submitted. It will generally not be used to rate the vendor onits ability to perform on a particular contract. Various calculationsused to rate each of the vendors would be done on the computer platform.

The manner in which the intrinsic score is determined is illustrated inFIG. 2. Each of the vendors is provided with a series of questionsincluded in several categories at step 28. For the purpose of thealgorithm described in the present invention, these categories includegeneral and corporate information; market segmentation; client base;software development proficiency; operational procedures and work forceaugmentation. However, it should be noted that based upon the type ofvendors involved in the bidding process as well as the project to bebid, these categories can be altered. Within each of these categoriesare several other detailed inquiries and questions that are included.The general and corporate information include information relating tothe size of the corporation as well as the percentage of managementpeople and the percentage of sales in various regions of the world.Market segmentation is generally directed to the types and size ofprojects as well as the growth of the vendor's revenue.

The client base questions are directed to the percentage of the firm'srecent revenue in particular domains to gauge in which segment thisvendor is most significantly active as well as discussions on the numberof clients which the technology vendor currently/in the past hasserviced. If the contracts are directed to IT field, questions relatingto software development proficiency would be included. These questionsnormally relate to the proficiency of the vendor and the development oftechnology. Operational procedures generally relate to the amount inwhich the vendor operates such as whether a quality assurance program isin place. Questions relating to work force augmentation would bedirected to the technology vendors who regularly place “technologyprofessionals” and not so much engage in bidding for actual servicecontracts. As can be appreciated, the number and types of questions ineach of the categories can be altered for a multitude of reasons. As canbe appreciated, not all of these questions in the above-noted categoriesare equal. Consequently, each of these questions is assigned a weightedscore. Each of the vendors responses are noted and are assigned aparticular score at step 30. These scores are normalized for each of thecategories at step 32. The present invention would weight each of thecategories at step 34 with the total weights of all of the categoriessumming to 100. It can be appreciated that based upon the type ofproject upon which a bid is offered, different categories would havemore importance than other categories, and, indeed, one or morecategories can be assigned a weight of 0 to account for the customerpreferences. These weighted responses are entered or calculated on thecomputer platform.

Calculation of the Intrinsic Rating

The intrinsic rating (IR) is determined at step 36 utilizing equation(1).IR=ΣW _(i) *X _(i)  (1)

-   -   where W_(i)=Weight for category i    -   X_(i)=Normalized score for category i

The intrinsic rating is determined after normalizing each category withthe normalization factor being the highest score for that particularcategory. The final weights are multiplied with the normalized scores todetermine the final intrinsic rating for each vendor. This rating wouldbe scored from 0 to 1 with 1 being the highest attainable score. All ofthese steps are accomplished on the computer platform.

FIG. 3 illustrates a procedure for allowing the customer to modify theintrinsic rating (IR) of each vendor based upon vendor performance.Various questions are initially given to the customer for responsesthereto relating to the specific performance at step 38. The customer isalso given an opportunity to answer the same questions as included instep 38 or additional questions related to the specific vendorperformance at regular intervals at step 40. The answer to thesequestions are scored at step 42 and normalized at step 44. Based uponthe algorithm of the present invention for customer preferences, boththe IR score as well as the modified IR score are weighted in a mannerto reflect the relative importance of these scores. If it is judged thatthe IR score is more important than each customer's view of theparticular vendor, the IR score would be more heavily weighted. Whenthis value as described in FIG. 3 is added to the IR score, weightedaccording to preferences, the modified intrinsic score is calculated.The modified IR score would range between 0 and 1 with 1 being thehighest rating, and would be included on the computer platform.

Calculation of the Two-Way Rating

To properly compare each of the vendors and to determine therisk-adjusted bid, a two-way vendor rating (VR) must be calculated asdescribed hereinbelow and illustrated with respect to FIG. 4. Thistwo-way rating is a modified implementation of Bayes' theorem wherebythe intrinsic rating is the “a priori” probability and a two-way ratingis the “a posteriori” probability. The two-way rating adjustment usesproject specific characteristics and matches them to each vendor'sstated expertise. Vendor specific information required to compute thetwo-way rating is aggregated by the present invention during the vendorpre-certification stage or the calculations done in the previous section(intrinsic rating) of the invention. By taking into account relevantvendor knowledge, or lack thereof, the present invention's two-wayrating becomes a much finer assessment of project-specific successprobability compared to previous attempts which are based on the verygeneral assessment of vendor capabilities or various object assessmentsof “maturity levels”, seem weak in contrast. The two-way VR is expressedin equation (2).

 Two-way VR for k=[Q(x, k)×P(k)]/Q(x)  (2)

where Q(x, k) is the percentage of projects of type x that vendor k hasperformed in the past; P(k) is the intrinsic rating in a range of from 0to 1 of each vendor as described hereinabove, and Q(x) is the summationover all vendors of Q(x, k)*P(k). This means that the vendordistribution has been normalized such that the set of candidate biddersmakes up the entire distribution. It is noted that the two-way VR forvendors 1, 2, 3 and 4 in Table I would be 0.43, 0.24, 0.33 and 0.01,respectively. These calculations are performed on the computer platform.

Referring to FIG. 4, the present invention takes advantage of theability to partition a large contract into multiple stages or phases asshown in step 50. Since some of the modules or phases are more importantthan other stages or phases, the vendor's two-way rating would reflectthis fact. Therefore, the client would weight each of the stages orphases of the RFP with respect to their importance at step 52. Thevendor weights are then calculated showing the expertise for each moduleor phase of the RFP at step 54. This step would result in thecalculation of Q(x, k). Once Q(x, k), P(k) and Q(x) are determined, thetwo-way vendor rating VR is determined at step 56. It is noted that P(k)can either be the intrinsic rating or the modified intrinsic rating asdescribed hereinabove. These calculations are performed on the computerplatform.

Calculation of the Risk-Adjusted Bid

Once two-way VR is determined, it is utilized to calculate an adjustmentvalue to be added to the nominal bid to provide the risk-adjusted bidshown in the penultimate line in Table I for each of the four vendors.Equation (3) is utilized to make this computation.(1−Two-way VR)log_(e)(μ)*σ_(A) ^(BID) *C _(A)  (3)i.e. [1 Two-way Vendor Rating*log_(e)(Average Execution Time for theproject)*(Conditional Variance for Vendor A)*(Vendor Daily Cost Index)]The adjustment is based on the following data:

-   -   N=Number of Vendors Bidding for the module or the project    -   C_(A)=Vendor Daily Cost Index=Project Nominal Bid/Project        Execution Time (Modified Average Daily Cost)    -   C^(BID)=Vendor Bid/Vendor Average Daily Cost    -   C_(A) ^(BID)=Vendor Bid/Vendor Average Daily Cost    -   μ=Average of execution times of all Vendors    -   μ=1/N Σ C_(I) ^(BID) (Summed over all Vectors iεN)    -   (μ is the average time of execution of all Vendor bids on the        project)

Conditional Variance for Vendor A of exceeding the average time=(σ_(A)^(BID))²=1/N Σ{(C_(I) ^(BID)−C_(A) ^(BID))⁺²} (Summed over all VendorsiεN)

where we have the convention

(C_(I) ^(BID)−μ)+=C_(I) ^(BID)−μ if C_(I) ^(BID)−μ>0=0 otherwise

Utilizing this formula along with the information included in Table I,the conditional variance for vendors 1, 2, 3 and 4 would be 255.5; 0;288.63 and 255.5, respectfully. When plugged into the formula for therisk adjustment, the added risk adjustment for vendors 1, 2, 3 and 4would be 340,078; 0; 474,827 and 1,083,713. When added to the nominalbid, the total adjusted bid for vendors 1, 2, 3 and 4 would be 689,578;845,300; 726,227 and 1,193,713, respectfully. These figures are shown inthe penultimate line of Table I. Therefore, a review of Table I wouldindicate that while vendor 4 proposed the lowest nominal bid, when thisbid was adjusted, the total risk-adjusted bid was much greater than theamount for vendor 1 whose nominal bid was more than three times greaterthan vendor 4's nominal bid (note that the ratings, both the intrinsicand two-way ratings for vendor 1 are much higher). Thus allowing thecustomer to analyze that even though vendor 4 bid was the low4st therewas significant risk involved in selecting this vendor. The client wouldreview the risk-adjusted bids utilizing the information included inTable I to reach a decision and select a vendor. The client would useboth the nominal and risk-adjusted bids since various vendors haveflexibility in different areas, and local knowledge may be critical indetermining the optimal combination. These calculations are performed onthe computer platform.

The client may wish to go through a second round of bidding. If this isthe case, an updated RFP is completed and is sent out with slightlydifferent parameters and requirements. This might occur since the clientwill have learned to refine their requirements after the initial biddinground and will more accurately represent the client's needs during thissecond round of bidding. If this is not exercised, the client wouldselect the ultimate vendor.

The system of the present invention would include bidding instructions,one of which is to respond to breaking out the proposal into the samemodules or phases and for vendors to respond with a dollar and time bidfor each one. Additionally, since time of delivery of each module/phaseis important, each of the vendors would also supply the particular timeof delivery for each of the modules or phases as well as a total time tocomplete the entire project. The nominal dollar bid from each vendorwould be adjusted to compensate for the risk associated with weakervendors. This adjustment would be proportional to the risk involved indealing with that particular vendor. Weak vendors will experience highadjustments, while strong vendors will experience low adjustments. Usingthis risk adjustment method, the present invention will adjust thenominal amount of each bid to establish the risk-adjusted cost of thecontract when delivered by a particular vendor, allowing the customer amuch better assessment of the nominal bid and the risk inherent in theselection of a particular vendor. This risk adjustment would be includedalong with information relating to each of the modules or phases of thebid in a CTO decision matrix as shown in Table I, and would beaccomplished on the computer platform.

The CTO decision matrix is a basic summary report that enables a quickand substantive review of the bids received from the vendors on any RFP.In addition to the intrinsic and extrinsic two-way vendors rating andtotal execution time for the project, the matrix shows a time allocationfor each phase of the project and the price charged by each vendor foreach phase. The third line of the matrix shows the total execution timefor the contract. It is noted that the third to the last line of Table Iwould include the nominal bid of each of the vendors and the penultimateline would include the risk-adjusted bid based upon a method which willbe explained in detail. The risk-adjusted bids are computed on thecomputer platform using client-defined preferences with respect to costverses time, project parameters and the vendor-two-way ratings. Ingeneral, a weak vendor will have a much higher upward adjustment than astrongly rated vendor. The two-way rating shown in line four of Table Iaddress the suitability of using a specific vendor on a particularproject and incorporates relevant experience and prior history onsimilar projects. This process would yield a uniform scale through whichall vendors can be compared. Line 13 of Table I includes the estimatedcost of pricing delivery risk insurance on this project by the vendor.The manner in which this delivery risk insurance is calculated will bedescribed below.

As described hereinabove, one aspect of the present invention was todevelop a system and methodology that customers could use for rating andassessing the risk inherent in determining a particular vendor toutilize to perform a particular technological contract. The presentinvention developed the use of intrinsic as well as two-way extrinsicratings used to compare the bids promulgated by various vendors. Thepresent invention also developed a methodology of structuring aninsurance contract allowing customers to be able to hedge their risk ofusing various technology vendors. The result of the structure and methodis to reduce the shareholder risk to technology and vendor delivery forlarge corporations and to allow the outsourcing of technologicalprojects to on-shore and off-shore vendors. This would considerablyreduce the risk of outsourcing technology contracts.

The present invention addresses the offering of operational riskinsurance/surety for outsourcing services, both within the United Statesand overseas; notably to India, China, Philippines, Israel or theRussian Republic. These countries possess equivalent intellectualexpertise to United States vendors, but at lower costs. Many companiesbased in the West would hesitate to outsource technology projectsbecause of the perceived risk of various vendors located ingeographically remote areas both overseas and within the U.S. of livingup to their obligations under the particular technology contract. Thisis partly due to lack of knowledge of the various technology vendors inthis area as well as lack of standardized objective criteria throughwhich these overseas technology companies can be analyzed, rated andassessed.

Large corporations often live and die by the promptness with which theirtechnology is delivered. Core-business could suffer significantly iftechnology is either not delivered or not delivered on time. Themitigation of the economic consequences of such delays, and theassociated protection of the stock price for the large corporations isof paramount importance. Therefore, to provide insurance against suchcontingencies, one must first establish an unambiguous method to assessthe delay and then to construct an insurance/guarantee contract underwhich the policy will compensate the customer against the vendor who hasdefaulted. Therefore, it is important to define “default” so that itsoccurrence would trigger payment by the insurance company or guarantorto the customer.

Consequently, the present invention would allow large companies to“insure” vendor delivery for both domestic as well as overseas vendors.This would allow these companies to mitigate risk of doing business withunknown vendors based both in the United States and in foreigncountries. It would also enable the companies to test vendors who wouldotherwise would not be part of the selection pool but might exhibitskills which would be particularly applicable to a specific technologycontract. The present invention would also create better relationshipsbetween the customer and proprietary vendors, thereby giving thecustomers more options and a higher comfort factor—using this structurethey are for the first time protected against a vendor's non-delivery.

To determine the insurance premium, a number of factors must be analyzedto price the risk that a particular vendor would not timely deliver theproduct in a timely manner. This would include the net exposure of aninsurer following a claim lodged by the customer, the conditions uponwhich a claim on the policy can be made, the basis of risk estimationbased upon the number of modules/phases in the contract and theprobability of a default occurring at any point in time.

The present invention contemplates that a default would be declared anda claim made when a vendor fails to complete any stage within a pre-setlimit, known as the trigger value for that stage. Trigger values arecomputed as multiples of the cumulative time a vendor is expected tocomplete the series of stages leading up to any subsequent stage. Sinceall stages are contiguous and non-overlapping, the expected duration issimply equal to the vendor's cumulative time provided in the bidsubmitted to the client. These trigger values are included on thecomputer platform.

For example, a trigger value of 2.0 is defined as twice the amount oftime the vendor estimated that a particular stage of the contract wouldbe completed. Therefore, if the vendor in question specifies that stageone will be completed within 20 days, a default will be declared ifstage one is still not completed after 40 days. Completion is definedformally by the fact that each stage is associated with a specificdeliverables. If the client accepts the deliverable and signs off on it,the corresponding stage is deemed to be complete.

The key to premium calculation lies in the derivation of the requiredprobability distributions allowing the default probabilities to becomputed at each phase or stage.

The trigger is the value of the delay probability where there issufficient certainty of a delay that a default can be declared under thepolicy. The default itself is not a probability. Either there is adefault or there is not a default. But the trigger is defined by thevalue of a probability and therefore is a number between 0 and 1.Technically, the vendor could always wait until the day of deliverywhere the delay probability may become 1 to declare default under thepolicy.

Referring to FIG. 5, we will now describe the methodology of determininga premium price to be charged for delivery by a particular vendor. Thevendor could be located both onshore and offshore. Similar to FIG. 4,the technology contract is partitioned into a number of modules orphases at step 58. Therefore, once the contract is initiated, thecontractual work can be monitored in terms of the number ofphases/modules that have been completed. At each prescribed timeinterval, the vendor's phase completed can be compared to expectedcompletion dates to determine the statistical estimate of theprobability of not meeting the delivery date. This can be accomplishedusing the computer platform. Late delivery of the phases/modules willresult in delays of the overall project unless the future phases can becompleted in less than their scheduled time. The original schedule hasbeen set up and monitored against vendor's actual deliver ofphases/modules. This schedule is entered on the computer platform,directly by using the internet with the vendor's indirect contact withthe computer platform. Alternatively, the bids can be scanned into thecomputer platform or entered by any of the known methods. As the projectprogresses, the delay probability would either increase towards 1 if itwould appear that the contract is being completed on a timely basis orwould decrease towards 0 if the contract has been delayed. Once thecontract has been partitioned, a price/time bid is obtained from eachvendor on each module/phase at step 60. Utilizing the methodologydescribed hereinabove, the two-way vendor ratings are determined usingthe computer platform and then used for each of the vendors at step 62.At this point, a shadow bid is obtained from a secondary vendor orproject guarantor to calculate the net exposure to the insurer/guarantorat step 64. The shadow bid from a secondary vendor or project guarantoris the price a well established technology company would charge to stepinto the defaulting vendor and taking over the task of completing theproject. Once this is accomplished, default triggers are negotiated atstep 66. This negotiation would be done between the customer and theinsurance/guarantor company. At this point, a discount rate R is alsodetermined. For sake of argument, we can assume a risk-free rate of 7%.

Once this is accomplished, various contingency exposures must bedetermined at step 68. These contingency exposures could include variousrisk factors such as whether the company is United States based or basedin a foreign country having an unstable political climate or economy.Various other demographic or economic factors could also be utilized todetermine the contingent exposures.

Step 70 computes using the computer platform the probability aparticular vendor will actually default at a particular module or phase.For each stage the default probability of a vendor is computed bycomputing the probability distribution of the cumulative completiontimes that the vendor has bid. From this distribution we estimate theprobability to the right of the default trigger (that has beenpreviously established) and that number is the default probability atthat stage. We assume that the individual stage completion timedistributions are normal with the mean given by the vendor bid and thestandard deviation given by the conditional standard deviation attachedto the vendor in a particular vendor set. We use both conditional andunconditional probabilities of default in different scenarios forcalculating the insurance/guarantor premium. The default probabilityP_(i) is hence determined at step 70. The premium at step 78 iscalculated by multiplying the sum of exposures by the defaultprobability as shown by equation (4). The calculation is made for eachmodule/phase.PremiumAmount=(1−VR)*ΣP _(i) *E _(i)/(1+R)^(t(i))  (4)where

-   -   VR=vendor two-way rating    -   P_(i)=the probability that the vendor will default after        completing module “i”;    -   E_(i)=the net exposure of the insurer after completing module        “i”;    -   R=suitable discount rate; and    -   t(i)=module “i” completion time when the trigger is breached at        that time.

TABLE II Phase 1 $252,947 Phase 2 $121,245 Phase 3 $54,923 Phase 4$21,362 Phase 5 $18,665 Phase 6 $5,782 Phase 7 $1,722 TOTAL $476,646

The summation portion of this equation is the sum of exposures for eachof the phases of the project as shown in Table I. Table II includes theexposure for each of the seven phases including the sum of exposures, inthis case being $476,646. Table II details the sum of exposures forvendor 1 in Table I. Since the two-way VR for vendor 1 is 0.434, when1-0.434 is multiplied by the sum of exposures $476,646, an insurancepremium of $269,787 is calculated. The insurance premium for vendors 3and 4 were calculated in a similar manner. It is noted that since vendor2 was outlier, no insurance premium could be calculated. The dollarvalue of each of the exposures decreases from phase 1 through phase 7.This results from the fact that the exposure decreases from phase 1through phase 7 since it is assumed that once one of the later phases isreached (such as phase 5), the first four phases of the contract werecompleted in a timely manner, resulting in a reduction of risk for theinsurer.

The overview of the present invention relating to the arrangementbetween various parties of the structure of the contract is shown inFIG. 6. The administrator 74 who provides on-going vendor ratings andmonitoring of the contract using the computer platform is the backboneof the present invention. The administrator would either alone, or withthe assistance of the customer 76 partition a bid into a plurality ofphases/modules. The administrator 74 would also obtain responses fromthe various vendors 77 regarding their past performances in general orspecific to the particular technology contract to calculate theintrinsic rating (IR) as well as the two-way extrinsic rating (VR) onthe computer platform. The administrator would be on-going rating agencywhich monitors vendor ratings and the technology service contracts. Itis noted that the intrinsic rating can be modified with the help of thecustomer 76. Based upon these factors, as well as the additional stepsshown in FIG. 5, an insurance premium or a guarantor's fee is determinedfor each of the vendors for a particular technology contract. Theguarantor (or the secondary vendor) 78 would also provide the shadow bidwhich we use to determine the net exposure to the insurance company 80.The insurance company determines the premium for the risk ofunderwriting the technology risk. This can be done directly or throughan insurance broker. It is noted that the administrator 74 can assistwith the determination of the premium using the computer platform.

Although the determination of the premium is not altered by thenationality of the vendor, different risks might be assumed in this typeof situation. This scenario is illustrated with respect to FIG. 7. Inthis instance, customer 80 wishes to have software developed by a vendor82 situated in a foreign country. The customer 84 would then contact aUnited States insurance company 86 who in turn would issue anoperational risk policy protecting customer 88 according to the terms ofthe project. The U.S. insurer 86 would contact an overseas insurancecompany 84 to re-insure a portion of the risk and would thereforereceive a portion of the revenue. The overseas insurer would do duediligence review on the overseas software vendor 82 and may hire a thirdparty 92 to provide a vendor risk rating to assess its own risk. Theoverseas insurer 84 provides the “first loss” piece while the customeronly deals with the U.S. insurer 86. If the project is declared indefault according to the terms of the policy, a U.S. based secondaryvendor/guarantor 90 would take over responsibility for the project andsee to its completion. All of the additional costs would be paid by theU.S. insurer 86. The reason for this mechanism is to create an initialcomfort level in the mind of the U.S. based customer unfamiliar withoutsourcing as a viable alternative in in-house development.

The overseas insurance company 84 would underwrite the local risk andestablish formal parameters under which they would take on a negotiatedportion of the operational risk related to completion of the project.The overseas rating agency 92 would conduct a due diligence review ofthe perspective software vendor 82, after which a rating would beissued. Armed with this rating, the overseas insurance company 84 wouldunderwrite the project and provide the U.S. insurance company 86 with a“first loss” protection layer in the form of a surety bond. The latterwould then “wrap” the foreign based reinsurer with a secondaryperformance bond by and between itself and the U.S. customer. Before theU.S. insurer could be called upon to pay on a default claim, the primarypolicy would have to be fully drawn. The U.S. customers would be relyingsolely on the secondary policy.

In order to execute such a program, and to price the risk assuming arisk-adverse counter party, it is important to define the net exposureof the U.S. based insurer following a claim, the conditions upon which aclaim on the policy can be made, the basis for risk estimation and, theprobabilities of default occurring at any point in time.

Risk neutral valuation must be accomplished under objective conditionsif fair pricing is to ensure. This is because the cost of the policy toUnited States based customers must still result in net cost savings overcomparable onshore developing costs despite risk-aversion by theinsurer. Final pricing will, as always, will be left up to bilateralnegotiation between the U.S. based insurer and the customer.

The policy is intended to deliver the required comfort level to U.S.based clients. This can be accomplished by contracting substantial aU.S. based software firm as a secondary vendor or a guarantor of theproject. In order for this method to work, the secondary vendor or theguarantor of the project (who provides the shadow bid) must be kept “inthe loop” in some nominal fashion during the project's final negotiationstage in order to have them price their services for the project if thewinning vendor were to default on contract delivery. The secondaryvendor or the guarantor would be paid a fee for costing out the projectand for providing project management. Alternatively, the presentinvention would contract with these firms on a global basis andnegotiate certain preferential terms owing to this special relationship.The net exposure to the United States based issuer is the differencebetween the shadow bid and the vendor's bid.

In the event of a default, the exposure of the insurance company isdefined as the difference between the secondary vendor's (or theguarantor's) firm bid and the primary vendor's bid of the portion of theproject that remains outstanding after default. This is because the U.S.based client is then assured of seeing this project completed for theamount originally budgeted, albeit with some potential time delay. Whenappropriate, the definition can be easily extended to include anadjustment for this delay. An alternative structure would have theexposure calculated as the difference between the primary vendor's bidand that of another “primary” vendor. However, it is highly unlikelythat a U.S. based customer having just been defaulted by an offshoresoftware vendor would seriously consider entrusting the projectcompletion to another offshore vendor.

Therefore, the value of the relevant set of contingent exposures can bequantified exactly at project inception. In order to price policieshowever, we would still need to determine the associated probabilitieswith which such contingent exposures would become liabilities of theinsurer in a given project. These contingency exposures are determinedutilizing the function point analysis, the default definition and thedefault probability estimates as previously described.

Although the invention has been described in terms of the preferredembodiments disclosed herein, those skilled in the art will appreciatemany modifications which may be made without departing from the truespirit and scope of the invention. For example, although the presentinvention discusses a situation for providing a technology contract, thepresent invention also is applicable to any contract capable of beingpartitioned. Additionally, once all of the relevant calculations aremade with respect to the intrinsic and extrinsic two-way ratings as wellas other distribution and normalization data, the adjusted bid as wellas the premium are calculated using specially designed software for thispurpose. All such modifications are intended to be included within thescope of the claims appended hereto.

1. A method for determining an insurance premium paid to an insurer froma customer for a technology contract utilizing a computer platform,comprising the steps of: obtaining a price/time bid from a plurality ofvendors for the performance of the contract; calculating on the computerplatform an intrinsic rating P(k) for each of the vendors based upon thestrength and performance of each of the vendors; calculating of thecomputer platform a component Q(x, k) for each vendor which quantifiesthe ability/suitability of a vendor to deliver on a “specific” componentof said technology contract or a Request For Proposal (RFP) based on thevendor's past performance; calculating on the computer platform acomponent Q(x) which is the summation of the Q(x, k) and P(k);determining on the computer platform an extrinsic two-way rating VendorRating (VR) of each of the plurality of vendors using the equation:Two-way VR=[Q(x, k)×P(k)]/Q(x) determining on the computer platform adefault probability value P₁ for each of the vendors; determining on thecomputer platform a first net exposure E_(i) for said insurer;determining a discount rate R; and calculating on the computer platforma premium paid to said insurer for each of the vendors utilizing theequation:Premium Amount=(1−Two-way VR)*ΣP _(i)*E_(i)/(1+R)^(t(i).)
 2. The methodin accordance with claim 1, further including the steps of: partitioningthe technology contract into independent modules/phases; obtaining saidprice/time bid from each of the vendors for said independentmodules/phases of the contract; and determining a second net exposurebased upon the completion of each of said independent modules/phases. 3.The method in accordance with claim 2, further including the step ofnegotiating a default trigger value for the contract.
 4. The method inaccordance with claim 1, further including the step of altering each ofsaid intrinsic ratings based upon customer preference resulting in amodified intrinsic rating.
 5. A system for determining an insurancepremium paid to an insurer from a customer for a technology contract,utilizing a computer platform comprising: means for obtaining price/timebids from a plurality of vendors for the performance of the contract;means for calculating an intrinsic rating P(k) for each of the vendorsbased upon the strength and performance of each of the vendors on acomputer platform; means for calculating a component Q(x, k) for eachvendor which quantifies the ability/suitability of a vendor to deliveron a “specific” component of said technology contract or a Request ForProposal (RET) based on the vendor's past performance on said computerplatform; means for calculating a component Q(x) which is the summationof the Q(x, k) and P(k) on said computer platform; means for determiningon said computer platform an extrinsic two-way rating Vendor Rating (VR)of each of the plurality of vendors using the equation:Two-way VR=[Q(x, k)×P(k)]/Q(x) means for determining on said computerplatform a default probability P_(i) for each of the vendors; means fordetermining on said computer platform the net exposure E_(i) for aninsurer; and means for calculating on said computer platform a premiumpaid to the insurer for each of the vendors utilizing the equation:Premium Amount=(1−Two-way VR)*ΣP _(i) *E _(i)/(1+R)^(t(i).)
 6. Thesystem in accordance with claim 5, further including a means forpartitioning the technology contract into independent modules/phases andreceiving price/time bids from each of the vendors for each of saidmodules/phases and further including a means for determining the netexposure based upon the completion of each of said modules/phases. 7.The system in accordance with claim 5, wherein said means fordetermining said two-way rating for each vendor uses data relating tothe intrinsic rating of each of the vendors based upon the generalperformance of the vendors as well as the specific past performancerelated to the vendors exposure in the particular technology.
 8. Thesystem in accordance with claim 7, wherein said means for determiningtwo-way rating for each vendor includes a normalized distribution forthe past performance for the particular technology of the contract forall of the vendors, said rating for each vendor being an extrinsictwo-way rating.
 9. A system for providing insurance protecting acustomer against the default of a vendor performing on a technologycontract utilizing a computer platform, the system including aninsurance company and a guarantor, the guarantor providing a shadow bidto be used to determine a net exposure to the insurance companycomprising: an administrator means partitioning the contract into aplurality of independent phases/modules, said administrator meansreceiving price/time bids from a plurality of vendors for each of saidindependent phases/modules, said administrator additionally receivinginformation from the plurality of vendors regarding their general pastperformances as well as specific past performances relating to thespecific type of technology of the contract, said administrator meanscalculating using said computer platform an intrinsic rating (IR) basedupon the general performance of each of the vendors as well as a two-wayrating (VR) based upon the specific type of technology of the contract;means for calculating an intrinsic rating P(k) for each of the vendorsbased upon the strength and performance of each of the vendors; meansfor calculating on said computer platform a component O(x, k) for eachvendor which quantifies the ability/suitability of a vendor to deliveron a “specific” component of said technology contract or a Request ForProposal (RFP) based on the vendor's past performance; means forcalculating on said computer platform a component O(x) which is thesummation of the O(x, k) and P(k); and means for determining anextrinsic two-way rating Vendor Rating (VR) of each of the plurality ofvendors using the equation:Two-way VR=[Q(x, k)×P(k)]/Q(x) wherein a premium is determined for eachof the vendors using said computer platform based upon said intrinsicrating and said two-way rating to be paid by the customer to saidinsurance company protecting the customer from default of theperformance of the contract by a selected vendor means for calculatingsaid premium utilizing the equation:Premium Amount=(1−Two-way VR)*ΣP _(i) *E _(i)/(1+R)^(t(i).)
 10. Thesystem in accordance with claim 9, wherein said administrator meansdetermines said premium.
 11. A system for providing insurance protectinga domestic customer against the default of a foreign vendor performingon a technology contract utilizing a computer platform, comprising: anadministrator means partitioning the contract into a plurality ofindependent phases/modules, said administrator receiving price/time bidsfrom a plurality of foreign vendors, for each of said independentphases/modules, said administrator means receiving information from theplurality of foreign vendors regarding their general past performance aswell as specific past performances relating to the specific type oftechnology of the contract, said administrator means calculatingutilizing said computer platform an intrinsic CIR) rating based upon thegeneral performance of each of the vendors as well as a two-way rating(VR) based upon the specific type of technology of the contract; meansfor calculating an intrinsic rating P(k) for each of the vendors basedupon the strength and performance of each of the vendors: means forcalculating on said computer platform a component O(x, k) for eachvendor which quantifies the ability/suitability of a vendor to deliveron a “specific” component of said technology contract or a Request ForProposal (RFP) based on the vendor's past performance; means forcalculating on said computer platform a component O(x) which is thesummation of the O(x, k) and P(k); and means for determining anextrinsic two-way rating Vendor Rating (VR) of each of the plurality ofvendors using the equation:Two-way VR=[Q(x, k)×P(k)]/Q(x) wherein a premium is determined for eachof the foreign vendors using said computer platform based upon saidintrinsic rating and said two-way rating to be paid by the customer tosaid domestic insurance company protecting the customer from default ofthe performance of the contract by a selected foreign vendor, andfurther wherein a portion of risk of non-performance of the contractwill be borne by said overseas insurance company utilizing the equation:Premium Amount=(1−Two-way VR)*ΣP _(i) *E _(i)/(1+R)^(t(i).)
 12. Thesystem in accordance with claim 11, further including an overseas ratingagency for assessing the capability of the selected foreign vendor forperforming the contract in a timely manner.
 13. The system in accordancewith claim 12, wherein said administrator means determines said premium.